• Chinese tech company Baidu on Thursday reported better-than-expected revenue and profit for the third quarter.
• Baidu noted a 12% surge in its non-online marketing revenue to the equivalent of $1.1 billion, mainly driven by its artificial intelligence cloud business.

BEIJING — Chinese tech giant Baidu on Thursday posted a 3% annual drop in third-quarter revenue, nevertheless beating market expectations amid AI cloud growth.

The revenue print came in at $4.78 billion for the quarter ending on Sept. 30. Net income for the period rose by 14% to $1.09 billion.

Baidu noted a 12% surge in its non-online marketing revenue to the equivalent of $1.1 billion, mainly driven by its artificial intelligence cloud business.

The company's U.S.-traded shares fell 2.3% at 08:42 a.m. ET in premarket trading following the release of its results.

Here's what analysts expected the company to report for the quarter, according to LSEG estimates:

• Revenue: $4.63 billion
• Net income: $857.17 million

Baidu had reported revenue of 34.45 billion yuan ($4.75 billion) and net income of 6.68 billion yuan for the third quarter of 2023.

Beijing-based Baidu operates one of the major web browser search engines in China, along with a frequently used maps app. The company also sells cloud computing services. Online marketing drives a significant portion of the firm's revenue.

Online ad spend from small and medium-sized businesses remained weak in the third quarter without noticeable improvement in the weeks since, management said on an earnings call. They forecast that China's stimulus announcements, which began in late September, will require time to take effect.

The growth in the AI cloud business offset "ongoing weakness" in Baidu's online marketing stream, CEO Robin Li said in the earnings release, also commenting on the performance of the company's Ernie generative AI model and chatbot.

"Our strong AI capabilities are gaining broader market recognition, as evidenced by increasing adoption of Ernie," he said.

Baidu has promoted its Ernie chatbot as a local alternative to OpenAI's ChatGPT, which isn't available in China. Ernie bot now has 430 million users, and programs access its underlying AI model around 1.5 billion times a day, more than double the 600 million rate in August, Baidu said last week.

"Despite the near-term pressures, we remain steadfast in our AI-focused strategy and are confident in our long-term trajectory," Li said Thursday. "As we further scale AI, we are emboldened to find how it can drive innovations and create value for consumers, enterprises and society at large."

During an earnings call later in the day, he added that he expects generative AI can turn Baidu search into the "new killer app in the age of AI."

Li said that about one-third of Baidu's code is now generated by AI.

In the meantime, generative AI is growing its revenue contribution to Baidu's AI cloud business, reaching 11% in the third quarter, the company's management said Thursday — up from 9% in the previous quarter and also up from 5% in the fourth quarter of last year, when Baidu started tracking generative AI revenue.

The company this month also announced that its Xiaodu AI Glasses will begin sales in the first half of next year. The wearable has at least one camera and uses Ernie's AI capabilities and Baidu's maps and search functions. While Baidu hasn't revealed a price, the product is widely expected to be a Chinese alternative to Meta's popular Ray-Ban smart glasses.

Baidu announced a management rotation last month, with Junjie He, previously head of the mobile ecosystem group, becoming the company's interim Chief Financial Officer, while former CFO Rong Luo assumed leadership of the mobile division.

"AI Cloud continued to show healthy and sustainable development in the third quarter," he said in the earnings release. "Meanwhile, Apollo Go continued to make operational strides, underpinning our confidence in the validity of the fully autonomous ride hailing business model."

Apollo Go, which operates Baidu's robotaxi business, reported a 20% year-on-year surge in rides in the third quarter. The average number of rides a month rose to 329,333 during the third quarter, up from 287,500 in the first half of the year, according to CNBC calculations.

Li told investors that the company is actively exploring Apollo Go's international expansion, but did not specify locations or a timeframe.